AN APPRAISAL OF DEPOSIT AND LENDING POLICIES IN NIGERIAN DEPOSIT MONEY BANKS

(A CASE STUDY OF ACCESS BANK PLC, KADUNA)

CHAPTER ONE

1.0     INTRODUCTION

1.1     Background to the Study

In a modern economic system, there is distinction between the surplus and deficit economic units and consequently a separation of the savings and investment mechanism. This has necessitated the existence of financial institutions whose jobs include the transfer of funds from savers to investors. One of the institutions is the money deposits bank, the intermediating roles of the money deposit banks place them in a position of “trustees” of the savings of the widely dispersed surplus economic units as well as the determinant of the rate and shape of the economic development. The techniques employed by banks in this intermediary function should provide them with perfect knowledge of the outcome of lending such that funds will be allocated to investment in which probability of full payment is certain. However, in practice no such tool can be found in the decision of lending bankers. Virtually all lending decisions are made under creditors uncertain of the risk and uncertainties associated with lending decision situations are so great that the concepts of risk and risk analysis need to be employed by lending bankers in order to facilitate sound financial decision making and judgment. This statement implies that if risks are to be objective assessed, lending decisions by the money deposit banks should be based less on quantitative data and more on principals tools subjected to provide sound and unbiased judgment. Hence, the banks depend heavily on historical information as a basis for decision making.

Apparently aware of the inadequacies of his or her decisions base, the lending banker has often sought solace in tangible  and marketable assets as security giving the impression that lending against such securities is an insurance against bad debts. This makes the banker complacent with his loan port folio. The increasing trends of provision for bad and doubtful debts in most money deposit banks is a major source of concern not only to management but also to the shareholders who are be coming more ware of the dangers posed by these debts. Bad debts destroy part of the earning assets of banks such as loans and advances which have been described as the main source of earnings and also determine the liquidity and solvency which generates two major problems, that is liquidity and profitability, has to earn sufficient income to meet its operating costs and to have adequate returns on its investment.

Lending has becoming a vital function in banking operations in view of its direct effect on the economic growth and development in the business sectors. Thus, as far as banks are concerned, their activities are lending are as important as their deposit taking, considering the inter-relationships between lending and deposit taking. Although lending is risky, deposit money banks profit oriented organizations having a primary objective as profit maximization cannot do without lending out money. In most cases, they generate the highest proportion of their interest from lending. Moreso, the principal objective of lending of a bank is the provision of growth in profitability and liquidity within the economy.

Deposit money banks play an important role in the pass-through of monetary interest rates. Nevertheless, the efficiency of transmission of decisions of Central Bank is a complicated process and may depend on many factors such as: level of competition in financial industry, perception of credit risk, risk aversion, availability of close substitutes for loans etc. Moreover, banks may influence the external fiancé premium not only via the interest rate but also modifying the available maturity of loans or changing collateral requirements. Finally, as evidence by broad literature on bank lending channel, credit rationing and uncertainty about creditworthiness of borrowers may markedly influence banks risk taking thereby influencing their willingness to lend.

The existence of bank lending channel is conditioned on two important assumptions. First, monetary policy decision impact on the bank liquidity position; second, changes in the supply of loans affect borrowers because of constrained access to other sources of financing than bank loans. Tightening of monetary policy usually leads to decrease in the demand of deposit because banks adjust their deposit rates only partially to the other sector to equity investment funds. Shrinking bank’s liabilities force banks to decrease the supply of loans accordingly.

1.2     Statement of the Problem

Years after years, banks suffer much from the part of full loan extended which has for one reason or the other proved irrecoverable. Banks lose millions of Naira in various bad debts yearly and deposit efforts by bank management committee of chief inspectors and the bankers committee on the other hand, the rate of bad debts in banks is still on alarming proportion.

On the other hand, many banks experienced a lot of bad debts when new government abandoned the project awarded to the contractors by the former government. These contractors borrowed to execute the project awarded to them but could not repay the loan, due to government action on revamping the economy. Again, problem of bad debts also arise in respect of lapses on the part of the bank credit officers. For instance, these are due to excesses over approved facility, unformatted facilities and expired facilities not renewed in time in each of these cases, the customer may easily deny even owing the bank all or part of the amount. Deposit banks have always borne the burden alone, but this may not continue in future as the banks may be unable to take the risk of lending more but when eventually they do, they would seek the best way to come out of the risk with realistic reward which they are dearly failing to achieve at present.

1.3     Objectives of the Study

The objectives of the study are stated as follows:

i)                   To determine and appraise the lending procedures of Access bank plc

ii)                To ascertain the extent to which government intervention in lending policies of money deposit banks has influenced bad debts in Access Bank.

iii)              To highlight the extent to which improper project evaluation influence bad debt and lending policies of Access bank.

iv)              To highlight the rate at which inadequate collateral securities provision by borrowers increase the incidences of bad debts in Access Bank.

1.4     Research Questions

The following questions were formulated to guide the study:

i)                   What are the lending techniques and procedures used by Access Bank Plc?

ii)                To what extent has government intervention in lending policies of money deposit bank influence bad debts in Access bank plc?

iii)              To what extent does improper projects evaluation influence bad debt and lending policies of Access Bank Plc?

iv)              How do the inadequate collateral securities provision contributed to bad debt in Access Bank Plc?

1.5     Significance of the Study

The significance of this study to bankers will enable them to appreciate an appraisal of their lending control mechanisms now that they are expected to lend under tight monetary conditions. The economic as a whole will benefit from the study because if the level of bad debts is reduced, banks will be left with more profits to enable them make the expected contributions to the development of the economy.

The scholarly importance of this study cannot be overemphasized as the findings will contribute to existing body of knowledge, provide information, open up research areas and assist in the design of such studies for student researchers in related fields of study.

Moreso, the study will serve as a reference material to such future researchers who may wish to use the research results as a springboard to undertake their own research.

1.6     Scope of the Study

The scope of the study however be restricted to Access Bank Plc, Bida Road, Kaduna. The study will seek to determine and appraise the lending procedures of Access Bank, and to ascertain the extent to which government intervention in lending policies of deposit money banks has influenced bad debts in Access Bank. Furthermore, it will highlight the extent to which improper project evaluation influence bad debt of Access Bank and its lending policies as well as highlight the rate at which inadequate collateral securities provision by borrowers increase the incidences of bad debts in Access Bank Plc, Kaduna. The study shall cover the period of 2010 – 2015.

1.7     Historical Background of Access Bank Plc

Access Bank Plc, commonly refers to as Access bank but often called intercontinental is a commercial bank in Nigeria. It is one of the twenty-four (24) deposit money banks licensed by the Central Bank of Nigeria, the country’s banking regulator.

The bank was established in 1989 under the name Nigerian Intercontinental Merchant Bank Limited. That same year, the first subsidiary intercontinental securities limited, was established. In 1996, the bank acquired controlling shareholding in equity bank of Nigeria, a commercial bank. Also in 1996, Access acquired majority shareholding in West Africa provincial company plc (WAPIC), an insurance company.  

Access bank converted into a commercial bank in 1999. In 2002, the company listed its shares on the Nigeria Stock Exchange. In 2005, Access bank successfully merged with three (3) other deposit money banks, in which it held equity position prior to the merger, namely Equity bank of Nigeria, gateway bank and Global bank. In 2009, a special audit of the deposit money banks in Niger by the Central Bank to be undercapitalized and badly managed. Access Bank plc was one of the troubled banks. Following the injection of capital by the federal government of Nigeria to maintain solvency, the troubled banks have embarked on recapitalization through participation by new investors.

Increasing the capital base: according to its un-audited interim results at August 31 2006. Intercontinental has a capital base in excess of N61 billion ($491 million) ranked as Nigeria’s fourth most capitalized bank. Access bank is in the market to raise an additional N50 billion ($403 million) by way of a combined rights issue and public offer for subscription.

According to interim results for the first six months of the access bank financial year to August 2006, interest income is up close to 150% on the same period in 2005. Profit before tax is up 91.4% to N8.14 billion ($ 66 million) and the proposed interim dividend is up 100% at N3.2 billion ($26 million) (Access Bank Financial Statement 2006).

Access Bank has more than 200 branches national, rising to 280 by the end of February 2014. The bank has begun its continental expansion in Ghana, where it recently obtained approval in principles to commence operations. The bank intends to build its presence in major financial centers, including South Africa, the United Kingdom, United States of America, Hong Kong and Dubai. Access bank is a large finance services provide in West Africa. As at December 2008, the banks’ shareholder’s equity was valued at approximately S1.7 billion (N 261 billion). The share of stock of Access bank is listed on the Nigeria stock exchange (NSE) where they trade under the symbol: INTERCONT

1.8     Definitions of Terms

Character:  This is the credit worthiness of the borrower, based on his previous relationships with the bank and what his previous records on credit book looks like.

Capacity to Borrowers: This refers to the legal aspect of the borrower, whether he/she has the legal contractual capacity to borrow  such money.

Collateral Security: This refers to whether the lender requires you to put up assets often  referred to as collateral; this is a form of security guarantee to ensure that the lenders might recover their money incase of default on the path of the borrower.

Capital: Capital here refers to the borrowers contribution as to the amount required.

Lending: Lending is the process whereby fund is being given to an individual or organization after analyzing the facts of a loan request and making judgment about that information.

Borrowing: Borrowing is where deficit units of the economy, applies to secure fund from the surplus unit of the economy.

Policy: Policy is a general statement that guide the direction of an organization on a particular subject matter.